- 9M12 result below estimates. Guan Chong posted a 9M12 net profit ("NP") of RM94.3m, which was below our expectations and the consensus estimate, making up only 66.4% and 70.3% of the two numbers, respectively. The 3Q12 NP improved 5.7% YoY to RM27.4m due to lower costs. Meanwhile, the overall  9M12 NP registered a lower growth of 3.9% YoY. This was mainly due to the lower average selling price of cocoa despite a 12.5% increase in the sales volume. However, the impact was cushioned by  lower input costs, resulting in a YoY improved EBITDA margin of 13.5% as compared to 12.0% in 9M11. A 2.0 sen NDPS was declared in 3Q12, bringing the total YTD NDPS to 6.7 sen (adjusted).

- Expecting higher volume in 2013. Since our first report on 11 Sep 2012, the share price of Guan Chong has fallen by 23.2%. We believe this was partly due to the news on the company not proceeding with its secondary listing on the SGX-ST as well as the depressed cocoa prices, which dampened the industry's outlook. Nevertheless, we believe the sales of cocoa butter will gradually pick up ahead to help fill the new additional total capacity of 200k MT p.a. next year. On top of that, with the double-digit sales volume growth registered to date and the additional capacity after the recent expansion, we believe the sales volume will rise to mitigate the impact of the unfavourable cocoa prices and tap into a growing demand for cocoa-based F&B products in the emerging markets when its traditional markets slow down.  

- Be conservative.Although the 9M results usually make up 55%-73% of the full year results in the past years, we  still prefer a conservative stance on the company due to the sluggish cocoa prices. Thus, we are cutting our earnings estimates for FY12E by 10.3% to RM127.4m while generally maintaining our FY13E estimate at RM144.3m on the back of a better outlook for next year.

- Still a trading BUY. The stock is currently trading at 6.0x FY11A PER, 6.0x FY12E PER and 5.3x FY13E PER, which are undemanding compared to its 5-year average PER of 6.9x and the small cap F&B consumer stocks' trailling 12-month PER of 10.3x. In line with our earnings estimates adjustments, we have downgraded  our TP on Guan Chong to RM2.00 from RM2.40 previously based on a conservative Fwd PER of 6.9x (8.0 PER previously) over FY13E EPS.

- Strength:  The 5^th largest cocoa processor in the world with an extensive distribution network

- Weaknesses:Longer cash conversion cycle

- Opportunities:  Market expansion in US, Brazil, and Russia, M&A opportunities in US.  

- Threats: Higher price of cocoa bean, a slower export market.

- Resistance:RM1.70 (R1), RM1.90 (R2)

- Support: RM1.51 (S1), RM1.32 (S2)

Comments:  Guan Chong's technical picture has deteriorated significantly following the trend line violation at RM2.00. The subsequent heavy losses have placed the indicators  in a deeply oversold position, and a short term technical rebound may be on the cards. Regardless, we suggest that traders wait a more definitive reversal signal before buying into the stock.

GCB in involved in the cocoa processing business and is the top five largest cocoa processors in the world with a total capacity of 200k MT/yr (80k in M'sia & 120k in Indonesia) with presence in Johor (Pasir Gudang), Indonesia (Batam), and USA (Delaware). GCB exports its "Favorich" brand of cocoa products to >60 countries; its clientele include world-famous cholocate makers and leading cocoa ingredient traders e.g. Mars, Lotte, Arcor, Apollo, and Tate & Lyle. Its export market accounted for 94.3% of its total revenue in FY11 with USA, Singapore, Russia and Netherlands as its top export markets with revenue contributions of RM501m, RM139m, RM103m and RM88m respectively in FY11.

GCB sources its cocoa beans mainly from Indonesia and Africa and processes it into cocoa liquor, cocoa butter, cocoa cake and cocoa powder. Its FY11 revenue breakdown by product range were:

- Cocoa butter (39%)

- Cocoa cake (30%)

- Cocoa powder (21%)

- Cocoa Preparations (5%)

- Cocoa liquor (3%)

- Covertures & Confectioneries (2%)

Source: Kenanga